American Capitalism

-- by Robert M. Liu

Conservatives call our capitalist world the Free World. This is because they believe that the foundation of a free society is an individual's private property ownership rights and that capitalism is based on this concept. In other words, if private property ownership rights are not respected, there is no capitalism and no liberty.

Having said that, I must hasten to point out that capitalism has many deficiencies. Therefore, many people don't like it. The problem is: After more than one hundred years of social and economic experiments with other systems such as socialism and communism, free-market capitalism remains a far more effective way to run our economy, and despite its many ups and downs over the years, American capitalism is still the most efficient economic system in the world.

Take communist China as an example. I see myself as one of those with a good knowledge of China's communist rhetoric and Marxist jargon. Sometimes, I just can't resist an impulse to poke some fun at such rhetoric and jargon. For instance, America used to be "U.S. imperialist paper tiger" in China's jargon till the late 1970s when the country's late senior statesman Deng Xiaoping took over.

Today, the Chinese currency, yuan, is pegged to the U.S. dollar -- the paper currency of "U.S. imperialist paper tiger" -- at the exchange rate of US$1.00 to 8.277 yuan. Although the U.S. government wants China to eliminate the peg and let the yuan float in the open market, China's central bank refuses to budge, because it believes the dollar peg provides stability to the Chinese economy.

That is tantamount to admitting that "U.S. imperialist paper tiger" ensures Chinese economic stability and prosperity. Ironically, this joke of mine is not far from the truth. Just imagine what would happen to the Chinese economy if "U.S. imperialist paper tiger" shut down its market to billions of dollars worth of Chinese products.

This is an indication of the importance of American capitalism -- it has created a dynamic U.S. economy with great demands for goods from all over the world. American capitalism not only helps the Chinese economy, but also the Canadian economy, the Japanese economy, the Mexican economy, the EU economies, the Southeast Asian economies etc. In short, without American capitalism, the world economy would collapse.

But American capitalism is like a big casino. There are risks, as is demonstrated by the stock market meltdowns of recent years, and there are winners and losers. Businesses and investors do not always make money. Their fortunes depend on the environment. If they have a business-friendly environment, their odds of winning improve. If they face a hostile environment, they lose. That's why they look to the government for business-friendly policies.

Here, there is a sure winner -- the government. This is because if we compare American capitalism to a casino, we may draw an analogy between the U.S. government and a casino operator, between business investors and casino punters. While the punters (i.e. business investors) can win or lose, the casino operator (i.e. the government) always wins.

The challenge to this special casino operator (i.e. the U.S. government) is that it must win big-time in order to fulfill its numerous humanitarian and welfare responsibilities such as Medicare and Social Security. So it must charge its customers -- the punters in "Casino American Capitalism" -- fees for its services in the form of taxes.

Here, the operator of "Casino American Capitalism" faces a dilemma: It must calibrate its service fees (i.e. taxes) appropriately. If it charges too little, its revenue may not be sufficient to meet its humanitarian responsibilities. If it charges too much, its customers -- the punters in the Casino -- may consider leaving for some other casinos.

Ideally, the service fees (i.e. taxes) charged by the casino operator (i.e. the U.S. government) are reasonable and acceptable to the punters (i.e. business investors), and the punters will win big-time so that the revenues for the operator of "Casino American Capitalism" will increase big-time too. That would be a win-win situation. Put in economic terms, that means a growing economy or GDP would benefit both the government and the business investor community.

Now, there is talk that because the amount of payroll taxes paid into the Social Security Fund will someday fail to match the amount paid out to retirees from the Social Security Fund, America's popular Social Security system will eventually go bankrupt, so it needs to be reformed. One of the reforms proposed by the Bush administration is to allow younger workers to put a portion of their Social Security money in individual investment accounts under certain guidelines.

Desperate to stop this from happening, the Democrats are drumming up their scare tactics, telling the public how risky it would be if Social Security money is put in the stock market. Yet there is something in their arguments which fails to add up.

First, it was none other than Democratic president Bill Clinton who told reporters in the late 1990s that in the long run stocks tended to perform better than treasury bonds. Actually, he just pointed out a fact. If you visit website www.msn.com, you can find the long-term chart of the Dow Jones Industrial Average there.

In 1942, after Pearl Harbor, the Dow fell to its multi-year low of less than 93. By 1945, it had recovered its losses. After Japan surrendered in August 1945, a long period of economic prosperity was ushered in. It lasted 20 years till the Vietnam War broke out in the mid-1960s. By then, the Dow was around 1000.

This was followed by a long period of stagnation, and stocks were not doing well in the 1970s. In autumn of 1982, with high interest rates in place, the Dow fell below 800 before it started to rise all the way to its 1987 high of 2700. After a sharp retreat in October 1987, the Dow resumed its advance in 1989. Despite a recession in the early 1990s, the Dow was above 3000 when Bill Clinton became president.

Then came an economic boom, for which both the Clinton administration and the GOP-controlled Congress took credit. It doesn't matter who deserves credit, as long as America's 401(k) and IRA portfolio holders benefit. If you have maintained an individual investment account throughout the 1990s, you must be much better-off today than you were in the early 1990s.

In early 2000, the Dow hit its all-time high of 11700 before the tech bubble wreaked havoc on the stock market. This was followed by a recession, corporate scandals and 9/11. In 2002, months after 9/11, the Dow fell to its multi-year low of less than 7300 -- I would add, just like it hit its multi-year low in 1942.

What is interesting is that the Dow has since risen 50% from 7300 to 10936 (as of March 7, 2005), recovering most of its 9/11-related losses, just like it recovered its Pearl Harbor-related losses in the 1940s. If you believe that history might repeat itself in 60-year cycles as the ancestors of the Chinese did, you should be looking for a much higher Dow in the next 20 years -- say, 70,000 on the Dow by 2025. Of course, this is only a guess.

Democrats like to say that the Republicans are the party for the rich because the GOP is really a pro-business political organization. Well, we all want to become rich, don't we? The question is: How did rich people become rich in the first place? By keeping their money in savings accounts? Probably not. They are rich because they don't waste their money, because they have invested their money wisely.

So, the Bush proposal for individual investment accounts would create an investment opportunity for working Americans. This doesn't mean they should invest in risky individual stocks. They don't have to. The secret to limiting investment risks is to diversify one's investments. A young worker can put part of his Social Security money in a stock index fund.

For instance, the price of one share of the Diamond Trust Fund (DIA) is around US$109.36 -- about one hundredth of the Dow Jones Industrial Average. When a worker purchases one share of DIA, he actually gets a little bit of each of the 30 Dow component companies. So, even if one of the 30 companies goes bankrupt, he doesn't have to worry about losing all his investment.

What fails to add up in the Democrats' arguments is: On the one hand, they criticize the Republicans for helping the rich. On the other hand, they are doing everything possible to prevent younger American workers from taking investment opportunities to become better-off.

If long-term stock market investment is such a bad idea, why are those with 401(k) accounts are better-off than those without? The U.S. economy needs investments from all over the world and from people of all classes. It is morally wrong to obstruct investment opportunities for working Americans. An opportunity to become better-off is right in front of their eyes. Why take it away from them?

One TV advertisement from the Democrats mentions Social Security benefits as "guaranteed". But if the amount of money paid into the Social Security Fund fails to match the amount paid out to retirees, somewhere down the road, what is "guaranteed" today may not be "guaranteed" then.

In some sense, life is a gamble -- few things in life are "guaranteed". Every day, we have to make decisions. One wrong decision could land us in big trouble. This is particularly true of investment decisions. For an individual American worker, whether to maintain a private investment account is an investment decision.

There are risks either way. If you don't maintain a private investment account, you definitely risk missing an opportunity to become better-off. That's not a small risk either. Judging from the long-term performance of the Dow Jones Industrial Average, chances are if you don't open a private account and invest, you will lose big-time. And that's exactly what the Democrats want you to do!

Look at the robust U.S. economy. Corporate America's earnings performance is improving in an environment of lower taxes, low interest rates and moderate inflation, setting the stage for the Dow's further advancements. Apparently, much better times are ahead of us. The train is leaving the station. The Bush proposal for private investment accounts provides a timely opportunity -- what I would call the chance of a lifetime for working Americans.

If you miss out on this one, chances are you'll be very sorry. For sooner or later, you will wake up. But by then, with a much higher Dow, it would be too late. And it would be futile to blame the Democrats for pulling the wool over your eyes. They are politicians. They come and go. You need to decide for yourself and your money.

Now, what with the success of the Iraqi elections and the improved peace prospects for the Middle East, some Europeans are wondering whether George W. Bush has got something right or simply has got luck on his side. Since many people will never accept that George W. Bush has got anything right, I guess the man has luck. So, why not bet your money with the lucky man?

[March 8, 2005]